If the world woke up one day and decided to get rid of governments, this company would run into serious trouble. In fact, it would almost certainly have to fold tent. However, it’s unlikely that Government Properties Income Trust (NASDAQ: GOV) will have to consider such a scenario in its lifetime. As its name indicates, GOV relies for its business on the government and business is good.
The company could attract the attention of income investors who don’t mind a bit of risk. GOV is a real estate investment trust (REIT) and this puts it in a sector well-known for its cushy dividend yields. Right now, GOV’s stock yields 9.4%. Tempting, right? It may seem even more so when you consider that the shares are trading near their 52-week low. Let’s take a closer look.
GOV history and business overview
Newton, Massachusetts-based GOV has been in business since 2009. In June of that year, it went public, selling shares for $20 apiece.
The company’s portfolio mostly comprises US properties, mainly office buildings, with government tenants accounting for the majority of leases. GOV owns properties in 31 states plus the District of Columbia. It has about 11.4 million square feet of rentable space.
GOV also holds a 28% stake in Select Income REIT (NASDAQ: SIR). The latter focuses on investing in US single tenant properties and leased lands in Hawaii.
GOV concluded 2016 with 72 properties in its portfolio. Government entities accounted for 93% of its revenues last year.
The company has a market capitalization of about $1.8 billion.
Despite a very attractive dividend yield, investors could cross GOV off their watch lists due to the lack of distribution growth in the past few years. The quarterly payment has been stuck at $0.43 per share since 2013.
Risks with REITs
We’ve covered quite a few REITs in recent months. A regular reader of our posts will already be familiar with the potential pitfalls of investing in REITs. Nevertheless, let’s revisit them.
Investors are usually drawn to REITs because of the yields. They are very generous because a REIT structure requires the distribution of at least 90% of taxable income through dividends.
REITs are vulnerable to interest rate increases. Most of their cash goes into dividend payments so they have to get investment capital elsewhere. REITs secure capital through borrowing and equity offerings. But when interest rates go up, borrowing costs rise as well.
The investment case
Right now, shares in GOV are trading at $18.20. This compares to a 52-week high of $24.61 and a low of $17.41.
Late in June, the stock dived after GOV announced a deal to acquire First Potomac Realty Trust (NYSE: FPO) for about $1.4 billion, debt included. GOV sees this as an excellent opportunity to expand in the coveted Washington, DC market. Moreover, the acquisition will help it reduce its annual general and administrative costs by about $11 million.
What didn’t sit well with investors was the company’s announcement that it planned to raise funds for the acquisition by selling 25 million shares. When the news came out, GOV’s stock plunged 12% and now offers a good buying opportunity. An investment in GOV would mean acquiring a piece of the biggest landlord to the US government. Tenants don’t come more reliable than that, do they?
Still, potential buyers should keep in mind that federal and state budgets get cut. Any downward revisions would inevitably affect GOV’s results. We should also mention that GOV is an externally managed REIT and this always carries some risk.
On balance, though, one could argue that GOV is a relatively low-risk investment compared to the broader REIT sector. The bulk of its business comes from the most reliable client ever – the government. The acquisition of First Potomac should provide a nice boost to cash flows, which could in turn lead to dividend growth in the near future.
I do not have a financial interest in any of the companies featured in this article, nor do I plan on having one within the next three days.
This article reflects my opinions. The company is not paying me to write it and I do not have any business relationship with any companies mentioned in it.